Managing healthcare costs is always a challenge, and it only gets harder as you grow older. The impact of age makes it harder for people to stay healthy, but for those older Americans who are on Medicare and have succeeded in keeping themselves in good shape from a health standpoint, one little-known option can give you an advantage in managing your healthcare costs. Medicare Medical Savings Accounts, or MSAs, offer many of the same benefits that Health Savings Accounts give younger people during their careers.

How Medicare MSAs work

Medicare MSAs combine two key components. The first is a Medicare Advantage plan that is specifically tailored for the program, offering high deductibles that require you to retain financial responsibility for a substantial portion of your initial healthcare costs each year. The other component is the medical savings account, into which your Medicare MSA plan will make deposits to help you cover the healthcare costs you incur.

From a practical standpoint, the steps you'll follow depend on which provider you choose. Medicare Advantage plans are offered by private insurance companies, and each company has its own way of setting up medical savings accounts with approved financial institutions. Medicare pays your Medicare Advantage provider a fixed amount of money to cover your healthcare, and the amount that the plan receives in turn helps determine how much of it ends up going into your MSA.

Clipboard with Medicare document and stethoscope.

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The money that your Medicare Advantage plan puts into your MSA is available for a wide range of uses. Qualifying medical expenses for which you retain responsibility under the high-deductible provisions can be paid from MSA funds, as can your copayments or coinsurance amounts once the deductible is satisfied and Medicare coverage kicks in. Each time you use account funds, you'll need to fill out a form for your tax return that informs the federal government about the nature of the healthcare expenses you incurred.

The big benefit from Medicare MSAs

The best thing about medical savings accounts is that if it turns out that you don't need all of the money that the MSA plan puts into the account, you don't have to forfeit it. Instead, you can carry it forward and use it in future years if your health deteriorates. There's no limit to the amount of money you can carry forward, and if you are fortunate enough to have low healthcare expenses for several years in a row, then your balance can accumulate considerably. That creates a buffer that can help you if a big medical issue arises in the future. Moreover, you can name a beneficiary for the account, and if you pass away with money left in your MSA, your beneficiary will receive the remaining funds.

Moreover, the tax-free nature of distributions used for healthcare expenses makes MSAs valuable investment vehicles. A limited number of institutions accept MSAs for investment management, so it isn't as easy as picking a broker for more common products like retirement accounts. However, if your insurer has a good relationship with a high-quality financial institution, investment gains can boost your financial security.

Downsides of Medicare MSAs

Despite their advantages, MSAs aren't perfect. Unlike some Medicare Advantage plans, Medicare MSA plans don't incorporate prescription drug coverage, so you'll have to get a separate Part D policy on your own. In addition, some Medicare recipients aren't eligible for MSA coverage, including Medicaid recipients, those who get healthcare benefits from the Departments of Defense or Veterans Affairs, those with end-stage renal disease, and those who are enrolled in federal health benefits programs. Not all service areas offer Medicare MSAs, leaving them unavailable for those who live outside the limits where plans provide coverage.

Medical savings accounts also leave you responsible for substantial expenses, so they don't always work best for those who have higher-than-average healthcare costs. However, there's an escape valve you have every year with MSAs. Like other Medicare plans, you have the right on an annual basis to change your coverage, leaving a Medicare MSA plan for a different type of Medicare Advantage plan or going back to traditional Medicare.

Medicare MSA plans don't get much attention because many seniors aren't able to cover the initial costs of such a plan. For those who are healthier than average and have the financial resources to deal with an up-front deductible, however, Medicare MSA plans can be exactly the answer you want for your healthcare in retirement.